Debt fragilizes

We have been working on a project in my hometown called A Better Brainerd for most of this year. I've occasionally shared updates when they were relevant to this broader audience and today is example of that.

Last night there was a city council meeting here in my home town and the budget was discussed extenively. I wasn't there so I'm reactig to the press reports, but you'll get a sense here how one small town (13,500) has allowed debt and the aspiration for quick and easy growth to put it in a real bind.

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Making Money

Today in the Brainerd Daily Dispatch there was report of a very interesting exchange at last night's council meeting. It started with a logical question about the city's debt, a topic we've written about here before.

Matthew Seymour of Brainerd wanted to know more details on the city’s debt and how the city planned to handle the increased debt.

“This is a huge part of the budget and I’m more worried about the debt (than the increase in 2014 taxes),” said Seymour.

[Brainerd finance director Connie] Hillman said part of the reason why the debt is higher is because the city has not sold all of its industrial park properties. Once the properties start to sell the city will make money, she said.

City Administrator Theresa Goble said the city also hasn’t received all the money through its Beaver Dam Road and Riverside Drive improvement projects. Goble said once more people are hooked up to city services that the money will come in.

Let's first examine this notion that the city is going to ever "make money" once these properties sell. How does anyone know? Seriously, nobody has ever done the math to see if these properties will generate more revenue over the long term than they create in costs for the city. This math has never been done. There is no target number for sale price, land valuation or fee revenue that has been done. We have no clue if we will ever make money because nobody has ever figured out what that would take.

When the city finance director says "make money" that really means "cash flow," which is a far, far cry from being financially solvent over the long term. Is the tax base of these properties going to be sufficient to cover the cost of maintaining and servicing them over the long term? Nobody knows, but there is good reason to believe that, even if the lots sell, it won't even be close.

And that "if" is a BIG if. The city used borrowed money to gamble on new growth in the industrial park. There are currently 21 lots sitting empty with infrastructure in place just waiting. "Shovel ready," as they say in the business. City taxpayers are covering that gambling debt until there is some cash flow revenue from the sale of those lots.

Empty developments with full utilities off of Beaver Dam Road. Even if they build out, the tax base will never be there to maintain all of this.The same thing has happened with the Beaver Dam Road and Riverside Drive expansions. We have acres and acres of vacant property where the city, again with the use of public debt, is the gambling partner on speculative development. I think city officials would argue that these looked like sound investments until the housing market downturn but, unfortunately, even if these developments had built out as hoped, there was no wealth to be had for the city. We're not doing the math.

These are bad decisions we can't undo and so it does us little good to rehash them unless we can use the experience to draw some lessons. Here are two.

First, we shouldn't be considering another multi-million dollar expansion of the sewer and water systems out to the airport, even if the bulk of the cost for the initial installation is going to be covered by state debt, not local debt. We've shown that we are not very good at gambling on future growth (the reality is that no city is -- some are just luckier than others). If we've learned anything, it should be to shun these so-called "transformative" investments.

Second, there are other alternatives to the big gambling project and we should be pursuing those vigorously. In October, we released a report called Neighborhoods First that showed how we can implement the city council's stated priority of neighborhood investment by using an incremental approach. We outlined eight low risk, high return projects in the Northeast neighborhood that the city can do today. We also offered to train the staff and city officials (at no cost to the city) on how to incorporate this approach into their annual capital improvements and budgeting process.

We need to be honest with ourselves and acknowledge that our approach is not working, that we aren't ever going to "make money" in our current approach. We need a new mindset, one that plays to the city's strengths. We can improve the lives and fortunes of our residents and business owners and create real wealth and prosperity within this community, but only when we stop gambling and start investing incrementally in our core neighborhoods.